Dave Ramsey pushed back recently against some 401(k) criticism he’d heard. Ramsey was talking to a caller who had $275K saved in a 401(k) and who was on track for a secure retirement. Ramsey took the opportunity to mention an article he had read recently in which someone referred to a 401(k) as “the biggest scam ever perpetrated on the American public.”

Ramsey said that, since the caller was using his 401(k) successfully to build wealth, the caller likely did not believe the account was a scam — and that Ramsey and many other wealthy people also wouldn’t agree. Ramsey pointed out he knows many millionaires who have a significant portion of their net worth in their 401(k) account and that referring to the 401(k) as a scam is ridicilously ignorant. 

While some of Ramsey’s advice can be questionable (like swearing off credit cards), the finance expert is actually 100% right on this topic.  Here’s why. 

A 401(k) can be one of the most powerful wealth-building tools you have

As Ramsey rightfully pointed out, many people have a substantial amount of their net worth in a 401(k). And there is a very good reason for that. Investing in a 401(k) is a powerful wealth-building tool for a few big reasons:

• Many employers match 401(k) contributions: If your company offers a 401(k), there’s a very good chance that they match at least some of the money you put in. Matches are structured in different ways, such as a 50% or 100% match on contributions you make up to a certain percentage of your salary. Regardless of the specifics, though, matching contributions are free money that helps your account grow without you having to invest every dollar. 
• You get generous tax breaks with 401(k) accounts: If you choose a traditional 401(k) account, you can contribute with pre-tax funds. If you choose a Roth 401(k), you can make tax-free withdrawals. Either way, the subsidy can be very generous. If you are in the 22% tax bracket, each $1,000 you invest in a traditional 401(k) saves you as much as $220 on your IRS bill. This means the contribution only reduces take-home income by $780 after accounting for the tax savings. 
• The contributions are automatic. When you sign up to invest in your workplace 401(k), money comes out of your check automatically. You do not have to do anything to make it happen. This means the default is that you save money so your account grows without effort on your part. Some workplaces even auto-enroll you in a 401(k) so unless you opt out, you’ll begin working on building a secure retirement. 

For all of these reasons, it’s clear a 401(k) is not a scam. In fact, 401(k) accounts are so popular that Census data shows 92.1% of 401(k) account owners contribute to employer-sponsored retirement plans.

You should contribute to a 401(k)

If you are lucky enough to have a workplace 401(k), and especially one that provides a match, you should contribute to it. 

Ramsey suggests investing at least the amount you. need to get your match. Once you have done that, putting some money into an IRA at a brokerage account can provide good diversification as IRAs can offer more investment choices. But, a 401(k) with a match should still be priority number one and you can invest with confidence knowing Ramsey is right and they are not a scam in any way. 

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